Owning a home offers several money-saving tax deductions. With a rental property, you can write off even more things. If you own both types of property -- or multi-use properties -- you need to keep the personal deductions separate from the rental expenses. Keeping careful documentation of home-related expenditures should help you avoid problems with the Internal Revenue Service.
How Much of a Rental Home Is Tax-Deductible?
When you file Schedule E to report rental income, you also get to write off such expenses as maintenance, property taxes and even homeowner association dues. You can deduct depreciation on the property, which allows you to write off a portion of the purchase price over 27.5 years. The catch is that if you also use the property for personal use, you can't deduct the full amounts. For example, if you own a duplex and live in one half, you can deduct a pro-rated portion of expenses on Schedule E, and split the mortgage interest deduction between business and personal deductions.
Can a Home Refinance Be Deducted From Taxes?
The only cost of refinancing that's deductible is points, and the IRS has a laundry list of requirements before you're allowed to deduct the full amount of points in the year you refinance. It's worth taking a few minutes to see if you meet the criteria; otherwise you have to deduct the points over the life of the new mortgage, which means it could be 30 years before you take the full deduction. There is an exception to the rule, however: if you use the proceeds of the loan to improve the property, you can deduct the corresponding portion of points in the first year. For example, if 30 percent went to home improvements, you can deduct 30 percent of the amount you paid in points this year, and deduct the rest over the life of the loan.
Can Working From Home Be Used as a Tax Deduction?
The IRS has strict rules about taking a home office deduction. For example, to qualify, the home office should be "a primary" place of business for you. You must also use that area of your home exclusively for work. If you're self-employed, you use Schedule C or F and Form 8829 to take the home office deduction. If you're an employee who maintains a home office for your employer's convenience -- not your own -- you use Schedule A. If you meet the IRS criteria for a home office deduction, you can deduct prorated rent or mortgage payments, interest, utilities and depreciation.
Can You Double Count the Energy-Efficient Deduction With a Home Office Deduction on Taxes?
The answer is no. The American Recovery and Reinvestment Act of 2009 did introduce a collection of tax credits for energy efficient home improvements, but they only applied to residential uses -- if you used your home as a home office and took a tax deduction for it, that negated the residential use. The whole question is moot anyway -- the tax breaks expired at the end of 2011.
Can a Home Equity Line of Credit Be Deducted on Taxes?
It will come as no surprise that the answer to this question is "it depends." The IRS allows you to deduct interest on all mortgages used to buy, build or improve your residence, subject to a cap of $1 million of debt. If you used the money to maintain or improve your home -- for example, a new roof or swimming pool -- you can deduct the interest. If you use any portion of the money for other purposes -- for example, to pay college tuition, buy a boat or pay off credit cards -- your deduction is limited to an amount of $100,000 or the amount of equity in your home.
- Internal Revenue Service: Rental Income and Expenses
- Internal Revenue Service: Deducting Points
- Internal Revenue Service: Home Office Deduction
- Internal Revenue Service: Energy Incentives for Individuals in the American Recovery and Reinvestment Act
- Internal Revenue Service: Form Schedule C Instructions
- Energy Star: Federal Tax Credits for Consumer Energy Efficiency
- Internal Revenue Service: Limits on Home Mortgage Interest Deduction
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.